Has the slack gone from the rope so soon?

Three business days ago, we (somewhat skeptically) blogged about the proposed Euro-bailout plan and the relief rally it brought in its wake.  The gist was that the risk markets may be misinterpreting some slack in the rope that could hang the European Union as a severing of the rope altogether.

Last night, Greece reminded the world that the rope remains snugly in place.

Greek Prime Minister Giorgios Papandreou stunned the Euro zone last evening with the announcement that he will take the recently agreed-upon bailout plan to the citizenry for a referendum vote.  On one hand, there doesn’t seem to be anything particularly distasteful about asking a governed population in a democratic system their opinion on increased austerity.  On the other hand, all other European players at the table have to be questioning how in the world to negotiate with a leader who could pull such a stunt in the 11th hour.

In an article from Der Spiegel, expressions like, “shocked and furious, ” “stunned, ” “irritated, ” and “disorderly default” dominated the quotes from other European leaders regarding the referendum decision.  The Finnish minister said, “The situation is so tense that it would in principle be a vote on Euro membership.”

Should such a referendum actually take place, the results would be hard to handicap.  While over 70% of the polled Greek population believe it is beneficial to remain in the Euro zone, 60% view the new agreement as either negative or probably negative.

Rather than handicapping the outcome, we’d prefer to handicap the content of the referendum question.  Since we perceive the idea to be a purely political move by Papandreou, the referendum would likely be worded in such a way that its passage would be virtually assured.  If that wasn’t the case, why would Papandreou risk his country’s Euro membership and his political future on a stunt such as this?

And, to make this theater of the absurd even more…  well, absurd…  this just in from a socialist party official:  The referendum is “basically dead.”  That sentence fragment sent the Euro/USD up 90 pips and lifted the stock market 130 points from its pre-announcement lows.

Trading on sentence fragments…  Seems like a tough way to make a living.